Ebay to Acquire PayPal

Today, Ebay announced that it will acquire Pay­pal for $1.5 bil­lion in stock. The acqui­si­tion makes sense as it merges two suc­cess­ful Inter­net busi­nesses and turns the online auc­tion­eer into an end to end shop for online transaction.

Siz­ing up the businesses

Ebay is pri­mar­ily in the auc­tion busi­ness. Every­day, mil­lions of peo­ple buy and sell prod­ucts through the ser­vice. Ebay does not hold any of the inven­tory and focuses pri­mar­ily on pro­vid­ing a mar­ket­place for exchange.

In par­al­lel, Pay­pal pro­vides a ser­vice that allows peo­ple to send money elec­tron­i­cally by tying credit card num­bers to email addresses. 60% of Paypal’s busi­ness comes from peo­ple who are using Ebay for auc­tion and Ebay tried to com­pete with Pay­pal through its own ser­vice called Bill­point. The only prob­lem was that Bill­point never received the kind of sup­port Pay­pal enjoyed.

While other offer­ings (Yahoo Pay­Di­rect, Citibank’s C2It, West­ern Union’s Mon­eyZap) tried to go after the same mar­ket, Pay­pal estab­lished an early lead and hung on to it.

Fur­ther­more, Pay­pal has worked hard to work with mul­ti­ple credit card providers, and has estab­lished sig­ni­fi­ca­tion rela­tion­ships with com­pa­nies like UPS to cre­ate a sys­tem that allows for end to end pro­cess­ing of transaction.

Oppor­tu­ni­ties

At the same time, Ebay has been mov­ing closer to a fixed price model since the acqui­si­tion of Half.com and has expanded into pro­vid­ing other ser­vices for sell­ers. Com­bin­ing the ser­vices Ebay and Pay­pal have been offer­ing will mean pro­vid­ing an end-to-end solu­tion for any­body inter­ested in sell­ing goods online.

This puts Ebay on a col­li­sion course with Amazon.com, which is try­ing to attack the same prob­lem from the large provider end.

What’s Next?

Once the merger has been com­pleted, expect Ebay to inte­grate Pay­pal as part of its com­plete offer­ing and get rid of Bill­point. Once that is done, Ebay will col­lect fees on list­ing goods, trans­act­ing the busi­ness, receiv­ing the money, and deliv­er­ing the goods. This is a great model as it puts Ebay clearly in the lead in terms of offer­ing a com­plete solu­tion for online retailers.

Once it’s man­aged to do so for small retail­ers (as it does on Half.com and Ebay “Buy it Now” sell­ers), expect Ebay to start going after larger and larger cus­tomers. In the long run, I would not be sur­prised to see Ebay and Ama­zon bid on some of the same con­tracts, with Ama­zon show­cas­ing its ware­hous­ing capa­bil­i­ties as a plus, while Ebay would present its com­plete plat­form as the solu­tion of choice (let’s not for­get that Ebay now has a com­plete API already work­ing, which makes it eas­ier to inte­grate its ser­vices into other platforms.

Since both com­pa­nies offer capa­bil­i­ties for online sell­ing, I would expect them to fight it out on new fea­tures, with Ama­zon even­tu­ally suing Ebay over 1-click func­tion­al­ity and, after a set­tle­ment is reached, both com­pa­nies look­ing at the pos­si­bil­ity of a merger.

It looks like such a thing would make sense as both com­pa­nies have man­aged to amass large quan­ti­ties of cus­tomers and both are strik­ing out in sim­i­lar fields. Whereas Ama­zon focused on becom­ing a host to large com­pa­nies like Tar­get and Toys R Us, Ebay has focused on small retail­ers. Together, they could become the biggest host of online stores on the whole Internet.